The U.S.

Climate Task Force

Addressing Climate Change

Without Impairing the U.S. Economy:
The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief
A new study authored by Dr. Robert Shapiro, former
Under Secretary of Commerce for Economic Affairs,
along with Drs. Nam Pham and Arun Malik, has
analyzed the environmental and economic conse-
quences of adopting a politically-acceptable approach
to carbon-based taxes. By applying a new tax to the
use of energy based on its carbon content and
returning 90 percent of the revenues in tax relief for
the people and businesses using the energy and
paying the tax, the U.S. can reduce CO2 emissions
to levels consistent with protecting the climate and
offset the tax-related costs for most Americans.
The remaining 10 percent of the revenues would be
dedicated to accelerating climate-related research
and development and support for the broad
deployment of climate-friendly technologies.
The study employed the National Energy
Modeling System (NEMS), the model also used
by the Department of Energy for its forecasts, to
estimate the environmental and economic conse-
quences over the next 20 years of applying a
carbon tax strategy that recycles its revenues for tax
relief, and compared the results to those projected
under “business-as-usual” conditions by the Energy
Information Agency (EIA).
A carbon-based tax that would reduce U.S. carbon
dioxide emissions consistent with a long-term path
to safe levels would require a charge of about $50
per metric ton of CO2 (2005 dollars). Introducing the
carbon-based charge gradually would move business-
es and households to prefer less carbon-intensive fuels,
use less energy-intensive technologies and products,
and conduct their businesses and lives in other ways
that use less energy. The model found that a tax rising
from $14-per ton of CO2 in 2010 to $50 per-ton in
2030 would generate about $4 trillion in revenues
over 20 years, of which nearly $3.6 trillion could be
returned to households and businesses. These
recycled revenues would be sufficient to reduce, on
average, the annual payroll tax rate for workers and
businesses by a total of two percentage points. It also
would reduce CO2 emissions at least as sharply as

Figure 1. NEMS Estimates of CO2 Emissions under the Carbon-Based Tax Program
and Two Cap-and-Trade Proposals, 1990-2030

8,000
No Action

7,500

Bingaman-
7,000
Specter
(S.1766)
6,500
Lieberman-
McCain
6,000 (S.280)

Carbon Tax
5,500

5,000
04
00

08
06

24
02

20

30
28
26
22
14
10

18
94
90

16
12
98
96
92

20
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20
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Addressing Climate Change Without Impairing the U.S. Economy • Executive Summary
 The U.S. Climate Task Force
two leading cap-and-trade proposals (Figure 1). than one percent less than the $22.5 trillion projected
By 2030, this strategy would drive down U.S. CO2 if no action is taken on climate change (2005 dollars).
emissions by about 30 percent compared to what The direct and indirect effects of this approach for
they would be under the EIA’s business-as-usual creating an emissions path to preserve the climate
scenario (Figure 2). American GDP in 2030 would be also would have little effect on the economic
an estimated $22.3 trillion under this approach, or less prospects of average households: U.S. households
would earn an average of $88,330 per-year under the
Figure 2. Impact of the Carbon-Based Tax carbon-based tax package over this 20-year period,
Package on U.S. CO2 Emissions compared to $89,761 under current trends. The
approach would modestly reduce projected overall
energy use. Its greatest effects, however, would
8000
involve changes in the forms of energy used, shifting
7000 gradually away from carbon-intensive fuels such as
6000 coal, and towards non-carbon based alternative fuels
and less carbon intensive forms of energy (Figure 3).
5000
Every approach to climate change necessarily will
4000 involve higher energy prices. By capturing those
3000 price increases in a tax, this program can recycle its
revenues and sharply reduce both the direct costs
2000
of the tax for most businesses and people, as well
1000 as moderating many of the indirect costs.
0 The analysis and projections in the study fairly
2010 2020 2030
establish that the United States should be able to
G Business-As-Usual G Carbon-Based Tax use this approach to reduce its emissions levels
consistent with a long-term path to safe levels for
CO2 Emissions the global climate, at an annual cost of 1.6 percent
(million metric tons) of an average household’s annual income.

Figure 3. U.S. Energy Consumption, Percentage Difference by Fuel,

Carbon-Based Tax Package Versus Business As Usual, 2010 - 2030

300

225

Liquid
150
Natural Gas
Percentage Difference

Coal
Nuclear
75
Biofuels
Renewables
0

-75
28
29
30
25
26
27
10
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Addressing Climate Change Without Impairing the U.S. Economy • Executive Summary